1938 BTA LEXIS 891">*891 Petitioner seeks special assessment for reasons named in section 327(d), Revenue Acts 1918 and 1921. By reason of prior Board and court decisions, petitioner now has had included in its invested capital for the two taxable years before us, the cost of all its assets. Held, the record presents no such abnormal conditions affecting petitioner's capital or income as would entitle petitioner to have its excess profits tax determined as provided in section 328 of the Revenue Acts of 1918 and 1921.
38 B.T.A. 249">*250 In a deficiency notice dated March 12, 1926, the Commissioner determined deficiencies in income and excess profits tax for the calendar years 1920 and 1921 against petitioner in the amounts of $171,277.81 and $37,444.93, respectively. The sole remaining issue is whether petitioner is entitled to have its excess profits tax for these years determined as provided in section 328 of the Revenue Acts of 1918 and 1921. Upon motion made and considered July 14, 1937, it was duly ordered that the hearing1938 BTA LEXIS 891">*892 be limited to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.
The issues defined in subdivision (a) of Rule 62 have been settled in previous reports and decisions made in this and other proceedings formerly consolidated herewith. Before considering the issue defined in subdivision (b) of Rule 62, we shall give a brief resume of such previous reports and decisions.
This proceeding was in 1927 consolidated with eight other proceedings, two of which (Docket Nos. 16354 and 25984) involved this petitioner for years other than 1920 and 1921, three of which (Docket Nos. 15822, 16356, and 25985) involved the Peavy-Wilson Lumber Co., and the remaining three (Docket Nos. 15823, 16355, and 25986) involved the Peavy-Moore Lumber Co. On December 7, 1928, we promulgated a report () covering all nine proceedings, in which we held, among other things, that the three Peavy lumber companies were affiliated, and also that petitioner acquired certain timber rights from the Krause & Managan Lumber Co., Ltd., in 1909 rather than in 1913. On June 30, 1931, the Fifth Circuit handed down a decision, 1938 BTA LEXIS 891">*893 , involving all nine proceedings, in which it affirmed our holding on the affiliation issue, but reversed our holding on the interpretation of the contract between petitioner and the Krause & Managan Lumber Co., Ltd., the court holding that petitioner acquired the timber rights on July 28, 1913, rather than on November 20, 1909, when the contract was entered into. On January 18, 1932, we promulgated a second report () covering all nine proceedings, in which we determined for purposes of depletion and invested capital the cost and actual cash value, respectively, of the timber rights held by the Fifth Circuit to have been paid in for stock on July 28, 1913. On April 18, 1932, the Supreme Court handed down a per curiam opinion, , involving all nine proceedings, saying, "The judgments of the Circuit Court of Appeals in these cases are reversed and the cases remanded to the Circuit Court of Appeals with instructions to remand to the Board of Tax Appeals for further proceedings in conformity with the opinion of this Court in 1938 BTA LEXIS 891">*894 ." The effect of this opinion by the Supreme Court was that the three Peavy lumber companies were not affiliated for tax purposes during the taxable years involved. Thereafter, on May 31, 1932, petitioner 38 B.T.A. 249">*251 in the present proceeding (Docket No. 15824) filed an amended petition requesting that its excess profits tax for 1920 and 1921 be determined as provided in section 328 of the Revenue Acts of 1918 and 1921. On July 7, 1932, the Board "ORDERED that the petitioner be allowed to file an amended petition in this proceeding raising a question of the right to have its tax assessed under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921." On November 10, 1932, final decisions, from which no further appeals were taken, were entered in all the above mentioned dockets except Nos. 15824 and 16354. A decision was also entered on November 10, 1932, in Docket No. 16354, from which petitioner filed a petition for review by the Fifth Circuit, which court, on March 17, 1934, handed down its decision, 1938 BTA LEXIS 891">*895 , holding that the Board erred in its report at , in reducing the value on July 28, 1913, of $665,000 by an amount to reflect timber cut before July 28, 1913. The proceeding in Docket No. 16354 was finally closed with our report, , which was affirmed by the , and certiorari was denied by the Supreme Court, .
Thus we are left with the sole issue of special assessment in the present proceeding, Docket No. 15824. This issue was submitted upon oral testimony of one witness and upon a stipulation of facts. It was also agreed at the hearing that the record of evidence in the former hearings involving other issues, in so far as it may be applicable, shall be considered in the instant case. Inasmuch as all other issues save special assessment have now been settled, we shall make findings of fact only as they bear on the issue of special assessment.
FINDINGS OF FACT.
Petitioner is a corporation organized November 8, 1909, under the laws of the State of Louisiana, with an authorized capital stock of 5,000 shares of the par value of $1001938 BTA LEXIS 891">*896 per share, of which 2,500 shares were issued fully paid in 1909.
The capital of the company was principally invested in a mill and in such equipment as was necessary for the operation of a mill and to conduct the business of manufacturing and selling lumber.
On November 20, 1909, petitioner, as second party, entered into a written contract with the Krause & Managan Lumber Co., Ltd., as first party, wherein the first party contracted to sell to petitioner a tract of pine timber containing 206,140,227 feet. The salient provisions of that contract are these:
Paragraph 2. - A price fixed of $4 per thousand feet for the timber as cut and further provisions for the increase of that price according to a sliding scale set out in the agreement.
Paragraph 6. - The obligation of the petitioner "to build a double band saw mill and a planing mill of sufficient capacity to handle the 38 B.T.A. 249">*252 output of the mill in a modern manner" and other provisions for the efficient operation of such mill.
Paragraph 7. - A provision that "if either party shall purchase any timber in the territory below defined, the same shall belong to the party of the second part at cost * * * and1938 BTA LEXIS 891">*897 all timber purchased by either party in such territory shall be manufactured at the mill of the party of the second part, subject to the provisions and stipulations of this contract."
Paragraphs 13 and 14 of the agreement are as follows:
PARAGRAPH THIRTEEN.
It is agreed and stipulated by and between the parties hereto, as a further consideration of this sale, that if the lumber sawed from said timber should reach an average of sixteen ($16.00) dollars per thousand feet f.o.b. the cars at the mill of the party of the second part for any full semi-annual period as shown by the semi-annual statement of the party of the second part, then the party of the first part shall receive in addition to the four ($4.00) dollars per thousand feet hereinabove stipulated, twenty five cents per thousand feet for said timber, and twenty five per cent of any advance in average price for any semi-annual period over and above ($16.00) dollars per thousand. * * *
PARAGRAPH FOURTEEN.
As a further consideration of this sale it is expressly stipulated and agreed that when the net profits from the operation of the mill of the party of the second part shall have repaid the total original investment1938 BTA LEXIS 891">*898 in said mill and appurtenances and belongings, then the party of the second part will pay to the party of the first part one half of all net profits from the further operation of said mill and shall transfer a half interest in all the property and assets of the party of the second part or one half of its capital stock, less one share, to the party of the first part, as its option, provided, the party of the first part shall never acquire in any manner as much as one-half of the capital stock of the party of the second part. Dividends equaling at least ninety per cent of the cash profits shall be declared annually, after repayment of the original investment as hereinabove provided.
The Peavy-Byrnes Lumber Co. complied with all the obligations of the foregoing contract.
On July 28, 1913, the net profits from the operation of petitioner's mill had repaid petitioner's original investment therein, and on that date the Krause & Managan Lumber Co., Ltd., exercised the option provided for in paragraph 14 of the agreement and elected to take one-half of petitioner's capital stock. Accordingly, on July 28, 1913, 2,500 shares of petitioner's stock were issued to the stockholders of Krause1938 BTA LEXIS 891">*899 & Managan as the nominees of that corporation.
The timber which petitioner acquired from Krause & Managan under the terms of the aforesaid contract was necessary to the success of petitioner's business. Prior to the construction of its mill and manufacturing facilities, it was necessary to have the assurance of a supply of timber which would last for a good many years. The Krause & Managan timber afforded that assurance. It was upon the 38 B.T.A. 249">*253 strength of the acquirement of this timber that petitioner's mill and other manufacturing facilities were constructed.
During 1920 and 1921 petitioner cut 11,144,730 feet and 3,744,991 feet, respectively, of timber purchased by it from the Krause & Managan Lumber Co., Ltd., under the November 20, 1909, contract, for which footage petitioner paid, under paragraphs two and thirteen of the contract, $119,004.28 and $21,513.39, respectively. During this same period petitioner cut 14,318,727 feet and 15,008,659 feet, respectively, of timber purchased by it from parties other than Krause & Managan for which footage petitioner paid $88,517.31 and $69,803.86, respectively.
All of the timber mentioned in the preceding paragraph was cut1938 BTA LEXIS 891">*900 at one plant and was put through the same sawmill. It all came out of the same vicinity or block and was all pine timber. There was no distinction made in the cutting of the timber as to whether it should all be sold together or separately. It was all sold together as lumber, and no distinction was made in the price received for such lumber as to whether the timber had been purchased from Krause & Managan or from outsiders.
The respondent in his deficiency notice determined petitioner's invested capital, net income, excess profits tax, income tax, total tax liability, tax previously assessed, and deficiency for each of the taxable years here involved to be as follows:
| 1920 | 1921 | ||
| Invested capital | $483,668.76 | $427,718.34 | |
| Net income | 602,544.56 | 146,502.02 | |
| Excess profits tax | 213,332.37 | 34,048.58 | |
| Income tax | 38,473.86 | 11,245.34 | |
| Total tax liability | 251,806.23 | 45,293.92 | |
| Previously assessed | 80,528.42 | 7,848.99 | |
| Deficiency | 171,277.81 | 37,444.93 | |
| Percentage of excess profits tax to net income | percent | 35.41 | 23.24 |
The parties have stipulated that "in accordance with the final decisions in this and companion cases" petitioner's1938 BTA LEXIS 891">*901 invested capital, net income, excess profits tax, income tax, total tax liability, tax previously assessed, and deficiency for each of these years "computed without the benefit of special assessment" are as follows:
| 1920 | 1921 | |
| Invested capital | $698,679.36 | $745,885.62 |
| Net income | 523,406.93 | 134,499.41 |
| Excess profits tax | 169,636.72 | 14,365.71 |
| Income tax | 34,929.66 | 12,013.37 |
| Total tax liability | 204,566.38 | 26,379.08 |
| Tax previously assessed: | ||
| Original | 80,528.42 | 7,848.99 |
| Additional Sept. 14, 1929 | 113,947.16 | 3,449.65 |
| Deficiency (if special assessment is denied) | 10,090.80 | 15,080.44 |
| Percentage of excess profits tax to net income | 32.41% | 10.68% |
38 B.T.A. 249">*254 During the taxable years 1920 and 1921 there were no abnormal conditions affecting the capital or income of petitioner.
OPINION.
BLACK: Whether petitioner is entitled to have its excess profits tax for the years 1920 and 1921 determined as provided in section 328 of the Revenue Acts of 1918 and 1921, depends first upon whether it meets the required tests specified in section 327 of those acts. The material provisions of the latter section are the same in both acts and are1938 BTA LEXIS 891">*902 as follows:
SEC. 327. That in the following cases the tax shall be determined as provided in section 328:
* * *
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a nominal invested capital * * *.
Petitioner does not contend that it falls within any of the grounds specified in subdivisions (a), (b), or (c) of section 327, but relies solely upon subdivision (d). Cf. ; 1938 BTA LEXIS 891">*903 .
The parties are agreed that the sole question for consideration at this time is whether the record discloses abnormal conditions affecting the capital or income of petitioner. If so, petitioner has made a prima facie case under section 327(d), supra, notwithstanding that it can not be determined, in the absence of comparative data, whether there is gross disproportion between the tax of this petitioner and comparable taxpayers, or whether petitioner, in the light of such comparison, would be subject to exceptional hardship. These are matters for later determination, if that be necessary, under the provisions of Rule 62(c) of the Board's rules of practice. Cf. ; . Petitioner contends that both its capital and income were affected by abnormal conditions.
The principal abnormal condition allegedly affecting both capital and income which petitioner contends existed during the taxable years involved his its origin in the 1909 krause & Managan contract. Petitioner contends that if Krause & Managan, in1938 BTA LEXIS 891">*904 1913, had elected under 38 B.T.A. 249">*255 paragraph 14 of the contract to take one-half of all the net profits and a one-half interest in all of petitioner's property instead of one-half of petitioner's capital stock, which it did elect to take, petitioner would have been entitled to take one-half of its net profits as a deduction for additional cost of timber, and that the absence of such a deduction from gross income produced an abnormality in petitioner's net income. Among the errors assigned in the original and first amended petitions were that the respondent had erred in failing to deduct from petitioner's gross income for 1920 and 1921, one-half of the net profits for those years, and, in the alternative, that the respondent had erred in failing to find that the value of the 2,500 shares of stock issued to Krause & Managan on July 28, 1913, was $562,500, which value should be allowed both for invested capital and depletion purposes, instead of the value of $125,000 allowed by the respondent. On March 10, 1928, petitioner further amended its petition to strike out $562,500 and insert in lieu thereof $613,750; and on December 5, 1931, it amended the second amended petition to strike1938 BTA LEXIS 891">*905 out $613,750 and insert in lieu thereof $1,250,000. The Board and the Fifth Circuit have denied petitioner's contention for a deduction of one-half of its net profits, and it has been found from the evidence and finally decided that the value of the 2,500 shares of stock issued to Krause & Managan, or its nominees, on July 28, 1913, was $665,000, which value has been the basis for allowances in invested capital and for depletion deductions in the stipulated deficiencies set forth in our findings of fact. The alleged abnormality of capital is apparently based upon the fact that the Board did not find from the evidence that the value of the stock issued to Krause & Managan was $1,250,000, as alleged by petitioner in its third amended petition. It is true that the Board did not find that the capital stock issued to Krause & Managan had a value of $1,250,000, but that was because the evidence did not warrant it. We held that the evidence showed that the stock had a value of $665,000 on July 28, 1913, the basic date. We held, however, that these 2,500 shares were issued for the entire 206,140,227 feet in the tract on November 20, 1909; and that, since 52,124,702 feet had been cut between1938 BTA LEXIS 891">*906 November 20, 1909, and July 28, 1913, leaving on the latter date 154,015,525 feet uncut, the value of the stock issued in payment of the timber standing on July 28, 1913, was 154015525/206140227 of $665,000, or $497,135.92.
In this reduction the court held that we were in error and reversed us on that point. See . The court in the concluding part of its opinion said:
We agree with the Board's conclusion that the cost of the timber and the value of the stock ought to be and are the same. We agree too with its conclusion that a value of $665,000 as of that date is reasonable and supported 38 B.T.A. 249">*256 by the evidence. We do not agree with its conclusion that any less than this amount fairly represents the then value of the stock, the then cost of the timber exchanged for it.
The order of the Board is therefore reversed and the cause is remanded with directions to redetermine petitioner's tax liability in accordance with its finding of $665,000 as the fair market value of the stock, the cost of the timber, as of July 28, 1913, when the exchange was made.
It is true that the court's opinion above1938 BTA LEXIS 891">*907 referred to involved Docket No. 16354, which involved prior taxable years, but it is equally applicable here. In the stipulation filed by the parties, which has been embodied in our findings of fact, petitioner's income for the years 1920 and 1921 was recomputed on the basis of the court's opinion above referred to.
As illustrating the effect on petitioner's invested capital resulting from applying the prior Board and court decisions, we give the following example: Petitioner's invested capital, as determined in the Commissioner's deficiency notice, for the year 1920 was $483,668.70. Now it is $698,679.36, by giving effect to the adjustments which have been made. For 1921 petitioner's invested capital as determined in the deficiency notice was $427,718.34. New it is $745,885.62, by giving effect to the adjustments which have been made. Petitioner, in support of its contentions that it is entitled to special assessment, cites as authority ; ; 1938 BTA LEXIS 891">*908 ; ; ; and . The facts in this case are entirely different from the facts involved in the cases cited by petitioner and we do not regard any of them in point. Contrary to what took place in the cases above cited, all of petitioner's income producing assets, so far as we can see, have now been included in petitioner's invested capital in the manner provided by statute.
Petitioner also contends that by reason of this contract with Krause & Managan it was able to purchase timber at a total cost very much below the actual cash value of the timber and that therefore the contract possessed a certain intangible value over and above its cost of $665,000, which, although income producing, could not be included in petitioner's statutory invested capital. The facts, however, do not support petitioner in this contention. The contention would doubtless be a valid one if petitioner had paid only $4 per thousand feet as provided in paragraph 2 of the1938 BTA LEXIS 891">*909 contract, but by reason of paragraph 13 of the contract, petitioner paid Krause & Managan in 1920 and 1921 much more than $4 per thousand feet 38 B.T.A. 249">*257 for the timber. This was in addition to the $665,000 which had already been paid under paragraph 14 of the contract. During the taxable years 1920 and 1921 petitioner cut 11,144,730 and 3,744,991 feet, respectively, from the Krause & Managan tract. The parties have stipulated that petitioner paid Krause & Managan for this timber $119,004.28 in 1920 and $21,513.39 in 1921, under paragraphs 2 and 13 of the contract. The total average cost per thousand feet of this timber to petitioner in cash in 1920 and 1921 was $10.68 and $5.74, respectively.
During the same years petitioner cut 14,318,727 and 15,008,659 feet, respectively, from sources other than the Krause & Managan tract at a total cost of $88,517.31 and $69,803.86, respectively, which is at an average cost per thousand feet of $6.18 for 1920 and $4.65 for 1921, which was considerably less than the average cost per thousand feet of the timber cut from the Krause & Managan tract. We think these facts clearly show the lack of any so-called intangible value of the Krause1938 BTA LEXIS 891">*910 & Managan contract not included in invested capital, as contended for by petitioner. Cf. ; ; ; affd., ; certiorari denied, .
We have carefully considered every phase of this case and are unable to find any abnormal conditions affecting petitioner's capital or income. On the contrary, we think this is a case where petitioner's excess profits tax, computed without the benefit of the special assessment provisions of the statute, is high merely because petitioner earned within the taxable years a high rate of profit upon a normal invested capital. It follows that petitioner is not entitled to have its excess profits tax for 1920 and 1921 determined as provided in section 328 of the Revenue Acts of 1918 and 1921. Cf. ; ; 1938 BTA LEXIS 891">*911 .
Reviewed by the Board.
In accordance with the stipulation, decision will be entered that there is a deficiency of $10,090.80 for the year 1920, and that there is a deficiency of $15,080.44 for the year 1921.